Key index Nifty50 bounced back by 4% in March 2022 following a 3% decline in February despite geo-political pressures and continued FII selling. The BSE Mid-cap index also recovered 3.2% while BSE Small-cap index bounced back by 5.8%, outperforming the Nifty.
Global equities also made some recovery over March (1.9% MoM). Geopolitics dominates the narrative as markets face the binary risk from spiking commodity prices and central bank tightening. The effect of these factors is likely to be much bigger on consumer spending, with the drag of high energy prices compounded by central bank normalization. Indian equities rose 3.6% (US$ terms) outperforming regional markets in March (MSCI APxJ/EM: -0.9%/-2.5%).
Worldwide, most major indices bounced back with the US
S&P500 up 5.2%, Nikkei (+4.9%), FTSE UK (+1.4%) and Euro
Stoxx (+0.6%). However, Hang Seng declined 3.2%.
In sectoral trends, most sectors recovered except heavy commodity users like Auto (-2.3%) and Consumer Durables. Banks also remained flat potentially impacted by the high pace of FII selling. The best performing sectors were IT (9%), O&G (8.2%), Metals (7.6%) followed by Realty and Healthcare.
FIIs continued to remain net sellers of Indian equities in March (-$4.8 bn, following -$5.0 bn in February). This marked the sixth consecutive month of net equity outflows for FIIs. DIIs recorded inflows of $5.2 bn in March, maintaining the buying trend observed since March 2021. Mutual Funds and Insurance funds were both net buyers in March with $3.1 bn inflows and $2.1 bn inflows respectively.
CPI Inflation rose to 6.1% YoY in February from 6.0% in January, slightly above expectations. Core inflation however eased to 5.8% from 6.0% in January.
Index of Industrial Production (IP) growth improved to 1.3% YoY in Jan from 0.4% YoY in December indicating limited impact of the Omicron wave. However, weak numbers also continue to reflect the impact of supply bottlenecks like semiconductor chip shortage.
India’s Manufacturing PMI (54.9) and Services PMI (51.8) continue to remain in the expansion zone in February improving marginally from January levels. Services PMI continues to remain much lower compared to December’21 levels.
India’s FX reserves came in at $620 bn. FX reserves have declined by US$13.3 bn in the last 4 weeks. INR depreciated over the month (down 0.6% MoM) and ended the month at 75.79/$ in March.
Benchmark 10-year treasury yields averaged 6.83% in March (7 bps higher vs February avg.). On month-end values, the 10Y yield was up and ended the month at 6.84% (up 7 bps MoM). Oil prices continued their momentum from the previous month, gaining 5.7% in March.
Fiscal Deficit for April-February came at Rs 13.16 tn or 82.7% of the budgeted FY22 deficit (at Rs 15.1 tn or 6.8% of GDP). GST collections in February came in at Rs 1.33 tn (marginally lower than January collections of Rs 1.4 tn), up 18% YoY.
While India emerged relatively unscathed from the Omicron wave, thanks to a high level of vaccination and lower virulence, the global macro-economic back drop has become more challenging and the near-term impact on India is likely to be negative. Pending fuel price adjustments, rising global fertilizer and food prices, the passthrough of higher input costs to consumers and services sector reopening pressures will continue to push inflation higher and are likely to negatively impact economic growth and consumer demand.
However, higher government spending on infrastructure and measures to boost domestic manufacturing along with RBI’s accommodative stance should provide some offset. While we continue to remain constructive on the economic recovery cycle and Indian equities going forward, the recovery cycle is likely to be pushed out and more gradual impacted by the current geopolitical disruptions.
Source: Bloomberg, MSCI
Debt Market Review
The volatility in asset classes continued as geopolitical tensions between Russia and Ukraine escalated during the month. Commodity prices remained elevated and only softened a bit towards the latter half of the month with updates on Russia pulling back troops from Kyiv. Crude prices traded above the psychological USD 100/bbl mark for most of the month while briefly breaching USD 130/bbl as concerns built around the embargo on Russian crude.
With inflation pressures being seen globally, markets continued to witness various economies exiting from ultra-easy monetary policies, with Central Banks globally hiking interest rates to stem the spiraling inflation. CPI print in the US for February 2022 came in at 7.9% (multi decade high), with Core CPI also edging further higher up to 6.4%. Against this backdrop, the FOMC in its March meeting raised the federal funds rate by 25 bps with the dot plot suggesting additional rate hikes of 150 bps expected in 2022. The FOMC also indicated that necessary steps will be taken to ensure that higher inflation does not become entrenched. The FOMC minutes suggested the possibility of 50 bps hike in the May policy along with a reduction in the Fed Balance Sheet by USD 95 bn per month. The 10-year US Treasury yields rose sharply higher from 1.80%-1.85% levels to almost 2.50% during the month and are currently trading around 2.65%. The 2-year and 5-year US Treasury yields have seen an even sharper move up with the 5-year/10-year curve now inverted.
On the domestic front, CPI inflation for February came in at 6.07% (vs 6.01% in January 2022) due to an increase in food inflation, with Core inflation broadly unchanged. WPI inflation inched slightly higher to 13.11% (from 12.96% in January 2022). This was the 11th consecutive month with WPI print in double digits resulting in the average WPI reading for FY2022 being 12.72%. IIP data for January 2022 continued to remain weak at 1.3% (vs 0.7% in Dec 2021). Trade deficit for February 2022 came in at USD 20.88 billion (USD 13.12 bn last year). GST collections continue to remain robust with revenues for March 2022 at an all-time high of INR 1.42 trillion (higher by 15% Y-o-Y).
The G-Sec calendar was announced with the borrowing frontloaded at INR 8.45 Lakh Crs for H1 FY2023, higher than market expectations. Weekly auction sizes will be INR 32,000-33,000 Crs. In line with feedback from market participants, the GOI announced that issuances will also happen in the 7-year bucket going forward. The SDL calendar for Q1 FY2023 was also announced, with a gross borrowing for the quarter at INR 1.90 Lakh Crs. Gross T-Bill borrowing for Q1 FY2023 will be INR 4.32 Lakh Crs with weekly auction sizes of INR 33,000-34,000 Crs. The WMA limit for GOI for H1 FY2023 is set at INR 1.5 Lakh Crs. RBI announced another USD/INR 1.5-year Sell Buy Swap auction worth USD 5 billion to be conducted on April 26, 2022. This can be viewed as another tool used by the RBI for pulling out surplus liquidity from the system. Petrol and diesel prices have seen price hikes over the last couple of weeks on higher Crude prices with the cumulative increase now ~ INR 10 per litre.
10-year G-Sec traded in the 6.75%-6.90% during the month. Markets continued to witness good supply from Bank CD issuances, however commensurate demand for these papers kept levels in check. OIS levels inched higher during the month by 15-20 bps. Primary issuances in corporate bonds saw good demand from end investors, with cutoffs for a few issuances coming significantly below secondary market levels. Corporate bond spreads in the longer end continue to remain tight due to a lack of primary supply.
In this backdrop of policy normalization now being seen globally, soaring Crude prices and inflation prints above RBI’s estimate, what steps the Central Bank takes to manage the growth inflation tradeoff while ensuring smooth Government borrowing this year will be the key monitorable going forward.
Monetary Policy Review
The Monetary Policy Committee (MPC) came out with their bi-monthly policy statement today. Some of the key announcements are as follows:
● The MPC members unanimously voted for keeping the policy Repo Rate unchanged at 4.0%
● The Reverse Repo Rate under LAF and the MSF rate have also been kept unchanged at 3.35% and 4.25%, respectively
● The MPC introduced the Standing Deposit Facility (SDF), which will henceforth be the floor of the LAF corridor, currently at 3.75%. Correspondingly the LAF corridor has been restored back to 50 bps
● The MPC unanimously decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remained within the target going forward while supporting growth
In light of the recent developments around geopolitical tensions between Russia and Ukraine, soaring energy and commodity prices and global supply chain disruptions, the MPC revised the growth and inflation projection from the previous policy. Considering a base case assumption of a normal monsoon and average crude price (Indian basket) of USD 100/bbl the projections have been revised below:
● Real GDP growth for FY2023 has been revised downwards to 7.2% (from an earlier estimate of 7.8%) with the following quarterly projections: Q1 FY2023 at 16.2%, Q2 at 6.2%, Q3 at 4.1% and Q4 at 4.0%
● CPI projection for FY2023 has been revised upwards to 5.7% (from an earlier estimate of 4.5%) with the following quarterly projections: Q1 FY2023 at 6.3%, Q2 at 5.8%, Q3 at 5.4% and Q4 at 5.1%
Although the Governor reiterated the RBI’s commitment to ensure the availability of adequate liquidity to meet the productive requirements of the economy, he also mentioned that the RBI will engage in a gradual and calibrated withdrawal of the surplus liquidity (injected in the wake of the pandemic) over a multi-year time frame in a non-disruptive manner. The Governor also mentioned that the RBI remains focused on the completion of the Government borrowing program and will deploy various instruments as and when required. As a step towards this, the RBI enhanced the limit for inclusion of SLR eligible securities in the HTM category from 22% to 23% of NDTL.
One important inference from the Governor’s speech was that the RBI is looking to prioritize inflation over growth after a period of 3 years, which is evident from the sharp revision in inflation estimates. Additionally, there were also first signs of communication from the MPC talking about focusing on withdrawal of accommodation.
With the MPC now turning hawkish, markets witnessed a sharp sell-off across the curve. Money market rates moved higher by 20-25 bps. G-Sec and Corporate Bonds in the 2-5 year segment moved higher by 20-25 bps while longer tenor papers sold off by around 15-20 bps.
Markets were clearly looking toward the Central Bank for some support to narrow the supply-demand gap for the heavy Government borrowing. However, there was no concrete communication towards achieving that. Today’s policy seems to be the first step towards the inevitable policy normalization, which probably will begin with a stance change from accommodative to neutral followed by a hike in the repo rate. For RBI, the next few quarters will be a testing time, in terms of balancing out its various mandates – managing the growth inflation tradeoffs, ensuring that Government borrowing goes through smoothly while still maintaining its hard-earned credibility. From our fund’s perspective, we continue to remain cautious in our positioning across our actively managed funds till further clarity emerges on geopolitical risks, crude prices and also RBI’s tolerance levels for critical yield levels - before they come in to support the markets.
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